executive options
Rakesh Bhandari
bhandari at phoenix.Princeton.EDU
Tue Apr 4 14:38:18 PDT 2000
Doug,
I am confused by all this talk about how present valuations are based on a
rate of profit growth (15%) that means in so many years profits would eat
up all of GDP , if it continues to grow at its current rate (3%).
1. Why and how are present valuations dependent on that kind of
extended profit growth? Couldn't I buy at present values expecting no
more than say a 7% profit growth rate as long as I think buying on the
Nikkei poses great risk of destruction of my capital or bond purchases
are subject to great risk of loss of par (?) value (I guess that means I
would be anticipating higher interest rates in response to dollar fall
from current account deficits)? Perhaps investors just aren't expecting
much in the the possibilities of returns elsewhere and willing to accept a
lower rate of return on stocks or are simply paying premium for what they
take to be safety (and at any rate easy exit) from the highly liquid US
stock market? Didn't Brad deLong mention that possibility?
2. perhaps there's great expectations of profit rate growth from overseas
operations, and this is allowing profit growth expectations to race ahead
of US GDP growth rate expectations.
Sorry if this post is terribly confused. I should read an investor manual
one of these days.
Yours, Rakesh
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